Trump Tower woes signal Toronto’s condo market ‘on thin ice’

Herbert Crockett said his late father suggested investing in something he could touch, so he put cash into Donald Trump’s latest hotel project in Toronto where he could feel the marble under his feet.

It turns out that the hotel had nothing to do with him and that it isn’t a good investment after all

Crockett, a 75-year-old retired human resources director at the World Health Organization, said he bought a $904,000 hotel-condominium suite at the Trump International Hotel & Tower, Toronto, attracted by a presentation that showed he could make as much as 27% a year on his investment. Crockett is now suing Trump and the hotel’s developers for $2.6-million, and says he’s losing $7,000 a month because the unit he rents out is occupied on average about a quarter of the time.

Facing a multimillion-dollar lawsuit from disillusioned buyers, the developers of Toronto’s Trump International hotel are standing their ground, citing the property’s long-term investment potential.

Talon International directors Alex Shnaider and Val Levitan are at the centre of an escalating legal battle, in which buyers allege they were targeted by “an investment scheme and conspiracy based upon reckless and negligent misrepresentations” of the luxury hotel’s financial prospects.Continue reading.

“We bought into the Trump name and what we were being told was a hot real estate market in Toronto for this kind of project,” Crockett said in an interview. “It turns out that the hotel had nothing to do with him and that it isn’t a good investment after all.”

The brewing legal trouble is the latest sign that the real estate boom in a city with more skyscrapers under construction than any other in the world may be cooling as sales drop and prices climb. Canadian Finance Minister Jim Flaherty tightened mortgage lending rules in June and criticized “continuous building, without restriction” of condos. The central bank said last month that record consumer debt and the chance of a sudden housing correction are major risks to the economy.

“When people buy units purely as an investment and not to ever live in, it’s a sign that the Toronto market is on thin ice,” John Andrew, a real-estate professor at Queen’s University in Kingston, Ontario, said in a phone interview. “The luxury market always feels the cracks of a housing market first. Here we have the canary in the coal mine.”

Tallest Building

The Trump Toronto, the tallest residential building in Canada when it opened in January, is suffering from low occupancy and its residents are unable to get the financing promised to them, about two dozen buyers allege in their lawsuits against the Trump Organization and the tower’s developer Talon International Development Corp.

Donald Trump was not involved in selling the properties, said Alan Garten, personal legal counsel for the New York-based Trump Organization Inc. “These allegations are completely without merit,” he said in an email. “Trump was not involved in the sales process and Talon, the developer, made no representations to buyers regarding return on investment.”

Related

Billionaire Donald Trump was featured on advertising material for selling the hotel suites, his photo and comments praising the building appeared in magazine advertorials that highlighted the investment potential of the suites. He sold rights for the hotel to use his name and trademark via Trump Marks LP, his company that owns the Trump brand. He attended the tower’s opening in April. Donald Trump declined to comment through his attorney.

‘Unbelievable Success’

“We look forward to continuing to achieve great success at Trump International Hotel & Tower Toronto,” Ivanka Trump, executive vice president of development and acquisitions of the Trump Organization said in an emailed statement. “Our team is dedicated to providing world-class service and amenities only found in a Trump Hotel Collection property.”

When people buy units purely as an investment and not to ever live in, it’s a sign that the Toronto market is on thin ice

“The hotel is an unbelievable success,” Garten said, pointing to the hotel restaurant’s four diamond rating awarded by the Canadian Automobile Association and to review website TripAdvisor.com where the Trump Hotel occupies the number one spot for the city. Garten and Talon didn’t provide data on hotel occupancy.

Not Sophisticated

Crockett, who lives in Crozet, France, says he is “the victim of an investment scheme and conspiracy based upon reckless and negligent misrepresentations,” according to his statement of claim filed in the Ontario Superior Court on Dec. 5. The developer promised him between 5 and 27% return on investment, that the hotel unit was a safe investment with an annual cash flow, and that he could easily secure financing, he said. None of these projections materialized and Talon has avoided his questions in emails and phone calls, he said.

“These are not sophisticated investors,” said Javad Heydary, chief executive officer of Heydary Hamilton PC, the law firm representing Crockett and 20 other investors suing the developer and Trump.

The sales agreement is with Markham-based Talon International, the closely-held real estate development firm, according to the Agreement of Purchase and Sale, the document signed by buyers. The company is led by CEO Val Levitan and chairman Alex Shnaider, the 43rd-richest Canadian with a net worth of $1.5-billion last year on Canadian Business magazine’s Rich 100 list. Talon markets, sells, and manages finances for the units. Trump Toronto Hotel Management Corp. takes care of the suites.

Potential Returns

The return on investment document shown to potential buyers outlines possible returns based on a 55% to 75% occupancy rate. Below the chart it reads: “This is not a guaranteed investment program.”

Another document that buyers signed known as the disclosure statement highlights the risks of buying a suite, including competition from other luxury hotels, periodic oversupply of rooms, and economic downturns.

The Trump Toronto is a 65-story project with 118 traditional condos and 261 hotel-condo suites that don’t have kitchens. The buyer has the option of renting the hotel unit to guests through a reservation program.

“These kinds of developments are fraught with problems,” Andrew at Queen’s said. “Hotel-condos are at the high-risk end of the spectrum for commercial investment. You really have to wonder in terms of how much of a market there is for that in Toronto.”

Trump Paper

The hotel suites, where guests can watch a television embedded in the bathroom mirror and the toilet paper is stamped daily with a capital “T” for Trump, start at C$967,000 for a 571-square-foot unit. They run up to C$3.1 million for a two- bedroom unit that’s about 1,600 square feet. The condominiums sell for C$2.3 million to C$6.6 million and the “super penthouse” unit, the most expensive in the building, is owned by Shnaider.

“When we entered the market we were perceived as renegades and cowboys,” said Talon’s Levitan, seated in an ivory leather armchair in one of the largest suites, facing Lake Ontario. When other luxury hotels opened, “it validated our business model,” he said.

The hotel-condo units were not sold as an investment, he said. Banks and corporations purchase the hotel-condo suites to house their employees who are on business trips, and locals in Canada’s biggest city buy them as a so-called pied-a-terre, Levitan said. He denies the lawsuit’s allegations, saying it’s a case of “buyer’s remorse” and they reflect “a decision to get out from the deal.”

Bullion Chocolate

The hotel suites, which are supplied with gold bullion- shaped chocolate bars emblazoned with Trump’s name, are 80% sold, while the condo units are more than 60% sold, said Talon’s spokeswoman Dorenda McNeil in an email. All unsold hotel suites belong to Talon.

“The market can definitely handle a thousand more rooms among the ocean of other hotel rooms,” Levitan said, his red cufflinks clicking against a glass-covered table.

The Toronto housing market is due for a soft landing, according to Bank of Nova Scotia, the country’s third-biggest bank. Housing demand will weaken next year as foreign and domestic buyers reduce purchases, which could squeeze sales volume and prices in markets like Toronto, according to the bank’s senior economist Adrienne Warren.

Housing Supply

“We’re currently in a state of housing oversupply,” Warren said in a phone interview from Toronto. “Next year, we can expect sales to slow down and a cooling in new projects being launched with additional units coming onto the market at the same time.”

There’s the illusion of movement in the Toronto housing sector with sales and buyers. But now it seems more like a Ponzi scheme

Toronto condo sales declined 21% in the third quarter and the average price in Toronto rose less than 1% this year to $357,030. The average sale price for a home surged 33% to $334,204 in 2011 from $251,208 in 2001, according to the city’s real estate board.

The Trump tower competes with four other luxury hotels offering condo components, all of which opened in the past two years: the Ritz-Carlton, the Shangri-La Toronto, the Four Seasons Hotel Toronto and the Thompson Toronto. Trump’s hotel is the only one that offers hotel rooms for individuals to purchase.

“We’ve suddenly got a glut of luxury hotel rooms flooding the market and it will take time for the market to absorb them,” said Charles Suddaby, a vice president of hospitality sector valuation and advising in Toronto at Cushman and Wakefield Inc., a real estate brokerage firm. “It may take eight years for the project to get absorbed and gain a profit. It’s a shock to the system at the moment.”

Payment Deadline

The investors suing Talon and Trump didn’t pay the remaining purchase price by the Dec. 13 deadline and Talon filed a statement of defense and a countersuit for $750,000 against the first four buyers to file lawsuits. In the claim, Talon says it hasn’t provided “any false or misleading marketing and promotional materials.”

Crockett, visiting Toronto, said he won’t be investing in the city’s real estate market again.

“There’s the illusion of movement in the Toronto housing sector with sales and buyers,” he said, glancing outside a cafe onto the evening rush-hour crowd surging along Bay Street past his investment property 24 stories above. “But now it seems more like a Ponzi scheme.”